The Senate Banking Committee’s Hearing On Cryptocurrencies

On February 6, 2018, the United States Senate Committee on Banking Housing and Urban Affairs (“Banking Committee”) held a hearing on “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.” Both SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo testified and provided written testimony. The marketplace as a whole had a positive reaction to the testimony, with Bitcoin prices immediately jumping up by over $1600. This blog reviews the testimony and provides my usual commentary.

The SEC and CFTC Share Joint Regulatory Oversight

The Banking Committee hearing follows SEC and CFTC joint statements on January 19, 2018 and a joint op-ed piece in the Wall Street Journal published on January 25, 2018 (see HERE). As with other areas in capital markets, such as swaps, the SEC and CFTC have joint regulatory oversight over cryptocurrencies. Where the SEC regulates securities and securities markets, the CFTC does the same for commodities and commodity markets.

Bitcoin has been determined to be a commodity and as such, the CFTC has regulatory oversight over futures, options, and derivatives contracts on virtual currencies and has oversight to pursue claims of fraud or manipulation involving a virtual currency traded in interstate commerce. Nevertheless, the CFTC does NOT have regulatory jurisdiction over markets or platforms conducting cash or “spot” transactions in virtual currencies or other commodities or over participants on such platforms. These spot virtual currency or cash markets often self-certify or are subject to state regulatory oversight. However, the CFTC does have enforcement jurisdiction to investigate fraud and manipulation in virtual currency derivatives markets and in underlying virtual currency spot markets.

The SEC does not have jurisdiction over currencies, including true virtual currencies. However, many, if not all, token offerings have been for the purpose of raising capital and have involved speculative investment contracts, thus implicating the jurisdiction of the SEC, in the offering and secondary trading markets.

Chair Clayton repeated that “every ICO I’ve seen is a security,” and added, “[T]hose who engage in semantic gymnastics or elaborate re-structuring exercises in an effort to avoid having a coin be a security are squarely in the crosshairs of our enforcement division.” Chair Clayton is very concerned that Main Street investors are getting caught up in the hype and investing money they cannot afford to lose, without proper (if any) disclosure, and without understanding the risks.  He also reiterates previous messaging that to date no ICO has been registered with the SEC and that ICO’s are international in nature such that the SEC may not be able to recover lost funds or effectively pursue bad actors. Cybersecurity is also a big risk associated with ICO investments and the cryptocurrency market as a whole. Chair Clayton cites a study that more than 10% of total ICO proceeds, estimated at over $400 million, has been lost to hackers and cyberattacks.

It is becoming increasingly certain that the U.S. will impose a new regulatory regime over those tokens that are not a true cryptocurrency, which would likely include all tokens issued on the Ethereum blockchain for capital raising purposes. Clayton made the distinction between Bitcoin, which is decentralized, on a public Blockchain and mined or produced by the public and other “securities tokens” which are the cryptocurrencies that developed by an organization and created and issued primarily for capital formation and secondary trading.

Many tokens are being fashioned that outright and purposefully resemble equity in an enterprise as a new way to represent equity and capital ownership. Clearly this falls directly within the SEC jurisdiction, and state corporate regulatory oversight as well. Furthermore, there are instances where a token is issued in a capital-raising securities offering and later becomes a commodity, or instances where a token securities offering is bundled to include options or futures contracts, implicating both SEC and CFTC compliance requirements.

In the Banking Committee testimony, the SEC and CFTC presented a united front, confirming that they are cooperating and working together to ensure effective oversight. Both agencies have established virtual currency task forces and their respective enforcement divisions are cooperating and sharing information. Also, both agencies have launched efforts to educate the public on virtual currencies, with the CFTC publishing numerous articles and creating a dedicated “Bitcoin” webpage.

In addition to cooperating with each other, they are also cooperating and communicating with the NASAA, the Consumer Financial Protection Bureau, FinCen, the IRS, state regulators and others.

The Technology

Consistent with all statements by the regulators, both the SEC and CFTC agree that that blockchain technology is disruptive and has the potential to, and likely will, change the capital markets. Moreover, both agencies consistently reiterate their support of these changes and desire to foster innovation.  In fact, the new technology has the potential to help regulators better monitor transactions, holdings and obligations and other market activities.

Chair Giancarlo’s testimony states that “DLT is likely to have a broad and lasting impact on global financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis. When tied to virtual currencies, this technology aims to serve as a new store of value, facilitate secure payments, enable asset transfers, and power new applications.” In addition, smart contracts have the ability to value themselves in real time and report information to data repositories.

However, regulation and oversight need to be fashioned that properly address the new technology and business operations. Both agencies are engaging in discussions with industry participants at all levels. A few of the key issues that will need to be resolved include custody, liquidation, valuation, cybersecurity at all levels, governance, clearing and settlement, and anti-money laundering and know-your-customer matters.

Overall, Chair Giancarlo seemed more positive and excited about blockchain and Bitcoin, pointing out current uses including a recent transaction where 66 million tons of American soybeans were handled in a blockchain transaction to China. Chair Clayton, while likely also very enthusiastic about the technology, is currently more focused on the fraud and misuse that has consumed this space recently.

Current Regulations and Needed Change

While the agencies investigate and review needed changes to the regulatory environment, both maintain that current regulations can be relied upon to address the current state of the market. On the SEC side, Chair Clayton walked the Banking Committee through previous SEC statements and the DAO Section 21(a) report issued in July 2017. He again confirmed that the Howey Test remains the appropriate standard for determining whether a particular token involves an investment contract and the application of the federal securities laws. The current registration and exemption requirements are also appropriate for ICO offerings. An issuer can either register an offering, or rely on exemptions such as Regulation D for any capital-raising transaction, including those involving tokens.

Conversely, the current regulatory framework related to exchange traded fund products (ETF’s) needs some work before a virtual currency product could be approved. Issues remain surrounding liquidity, valuation, custody of holdings, creation, redemption and arbitrage. In that regard, in a coming blog, I will review an SEC letter dated January 18, 2018 entitled “Engaging on Fund Innovation and Cryptocurrency-related Holdings” outlining why a crypto-related ETF would not be approved at this time.  Senator Mark Warner was quick to point out that there seems to be a regulatory disconnect where an SEC governed ETF is not approved, but a CFTC-governed Bitcoin future is allowed.

The current federal broker-dealer registration requirements remain the best test to determine if an exchange or other offering participant is required to be registered and a member of FINRA. Chair Clayton repeats his warning shot to gatekeepers such as attorneys and accountants that are involved in ICO’s and the crypto marketplace as a whole. Chair Clayton expresses concern that crypto markets often look similar to regulated securities markets and even are called “exchanges”; however, “investors transacting on these trading platforms do not receive many of the market protections that they would when transacting through broker-dealers on registered exchanges or alternative trading systems (ATSs), such as best execution, prohibitions on front running, short sale restrictions, and custody and capital requirements.”

CFTC Chair Giancarlo reiterated that current regulations related to futures, options, and derivatives contracts, and the registration (or lack thereof through self-certification) of spot currency exchanges are being utilized in the virtual currency market. However, the part of the regulatory system that completely defers to state law may need change. In particular, check cashing, payment processing and money transmission services are primarily state regulated. Many of the Internet-based cryptocurrency trading platforms have registered as payment services and are not subject to direct oversight by the SEC or the CFTC, and both agencies expressed concern about this jurisdictional gap.

Giancarlo was especially critical of this state-by-state approach and suggested new federal legislation, including legislation related to data reporting, capital requirements, cybersecurity standards, measures to prevent fraud, price manipulation, anti-money laundering, and “know your customer” protections. “To be clear, the CFTC does not regulate the dozens of virtual currency trading platforms here and abroad,” Giancarlo said, clarifying that the CFTC can’t require cyber-protections, platform safeguards and other things that consumers might expect from traditional marketplaces.

Chair Clayton expressed the same concerns, especially the lack of protections for Main Street investors. Chair Clayton stated, “I think our Main Street investors look at these virtual currency platforms and assume they are regulated in the same way that a stock is regulated and, as I said, it’s far from that and I think we should address that.”

I am always an advocate of federal oversight of capital markets matters that cross state lines. A state-by-state approach is always inconsistent, expensive, and inefficient for market participants.

Both agencies are clear that regardless of the technology and nomenclature, they are and will continue to actively pursue cases of fraud and misconduct. Current regulations or questions related to needed changes do not affect this role. However, Chair Clayton did impress upon the Banking Committee that the current hiring freeze and budgetary restraints are an impediment. The SEC specifically needs more attorneys in their enforcement and trading and markets divisions.

Further Reading on DLT/Blockchain and ICO’s

For an introduction on distributed ledger technology, including a summary of FINRA’s Report on Distributed Ledger Technology and Implication of Blockchain for the Securities Industry, see HERE.

For a discussion on the Section 21(a) Report on the DAO investigation, statements by the Divisions of Corporation Finance and Enforcement related to the investigative report and the SEC’s Investor Bulletin on ICO’s, see HERE.

For a summary of SEC Chief Accountant Wesley R. Bricker’s statements on ICO’s and accounting implications, see HERE.

For an update on state distributed ledger technology and blockchain regulations, see HERE.

For a summary of the SEC and NASAA statements on ICO’s and updates on enforcement proceedings as of January 2018, see HERE.

For a summary of the SEC and CFTC joint statements on cryptocurrencies, including The Wall Street Journalop-ed article and information on the International Organization of Securities Commissions statement and warning on ICO’s, see HERE.

For a review of the CFTC role and position on cryptocurrencies, see HERE.

Inquiries of a technical nature are always encouraged. Contact us now.

SEC Statements On Cybersecurity – Part 2

On September 20, 2017, SEC Chair Jay Clayton issued a statement on cybersecurity that included the astonishing revelation that the SEC Edgar system had been hacked in 2016. Since the original statement, the SEC has confirmed that personal information on at least two individuals was obtained in the incident. Following Jay Clayton’s initial statement, on September 25, 2017, the SEC announced two new cyber-based enforcement initiatives targeting the protection of retail investors, including protection related to distributed ledger technology (DLT) and initial coin or cryptocurrency offerings (ICO’s).

The issue of cybersecurity is at the forefront for the SEC, and Jay Clayton is asking the House Committee on Financial Services to increase the SEC’s budget by $100 million to enhance the SEC’s cybersecurity efforts.

This is the second in a two-part blog series summarizing Jay Clayton’s statement, the SEC EDGAR hackingand the new initiatives. Part I of this blog, which outlined Chair Clayton’s statement on cybersecurity and the EDGAR hacking, can be read HERE . This second part in the series discusses the new cyber-based enforcement initiatives.

Previously I issued a blog outlining SEC guidance on the disclosure of cybersecurity matters, which can be read HERE.

Enforcement Initiatives

The SEC has established two new cybersecurity-related enforcement initiatives to address cyber-based threats and protect retail investors. The first is a creation of a Cyber Unit that will focus on targeting cyber-related misconduct. The second is the formation of a retail strategy task force that will focus on issues that directly affect retail investors.

Cyber Unit

The Cyber Unit will focus on:

  • Market manipulation schemes involving false information spread through electronic and social media
  • Hacking to obtain material nonpublic information in order to trade in advance of some announcement or event, or to manipulate the market for a particular security or group of securities
  • Violations involving distributed ledger technology (blockchain) and initial coin offerings (ICO’s)
  • Misconduct perpetrated using the dark web
  • Intrusions into retail brokerage accounts to conduct manipulative trading
  • Cyber-related threats to trading platforms and other critical market infrastructure

Chair Clayton formed the group with the goal of creating a cybersecurity working group to coordinate information sharing, risk monitoring, and incident response efforts throughout the agency. The Enforcement Division of the SEC has had to fast-track its expertise on matters related to cybersecurity including the advanced technologies that can be utilized.  It is thought that this focused enforcement initiative will further the SEC’s abilities to detect, respond to, and pursue misconduct.

On October 26, 2017, Stephanie Avakian, Co-Director of the Division of Enforcement gave a speech where she addressed both initiatives.   She addressed the obvious need for the Cyber Unit in today’s world of ever increasing cyber-related misconduct affecting the securities markets.

Expanding on the SEC’s list of areas of attention, Ms. Avakian indicates that the Cyber-Unit will also focus on cases involving failures by registered entities to take appropriate steps to safeguard information or ensure system integrity. The Cyber-Unit will work closely with the Office of Compliance, Inspections and Examinations (OCIE) in this area.

Further, the Cyber-Unit will review cases involving the failure by publicly reporting entities to properly report and disclose cyber related issues. The SEC has not yet brought a case in this space, but is expected to do so. The SEC expects companies’ to report cyber issues in risk factors and management discussion and analysis where appropriate and believes that the failure to do so could rise to a fraud issue under Rule 10b-5.

Retail Strategy Task Force

The Retail Strategy Task Force is planning to develop targeted initiatives to identify and pursue misconduct impacting retail investors.  The retail investor arena is a broad playing field including everything from the sales of unsuitable structured products to micro-cap pump-and-dump schemes. The Task Force will rely heavily on technology and analytics to identify problems. The Task Force includes enforcement personnel from around the country.

In her October 26, 2017 speech, Enforcement Co-Director, Stephanie Avakian stated, “this group will look at the many ways that retail investors intersect with the securities markets and look for widespread misconduct.” In a time of tight budgets, the SEC is focused on thinking strategically to identify problems and find the most efficient way to pursue enforcement actions including, as mentioned, with technology. Data analytics can be used to identify data by groups such as by product, by investor type, by location, by sales or trading practice, or by fee.  The SEC is even figuring out ways to use technology and data analytics to analyze the more than 16,000 tips it receives each year and integrate that data with other data points to identify issues.

Ms. Avakian gave specific examples of areas that the Retail Strategy Task Force will examine beyond the obvious Ponzi schemes and offering fraud, including:

  • Investment professionals steering customers to mutual fund share classes with higher fees, when lower-fee share classes of the same fund are available.
  • Abuses in wrap-fee accounts, including failing to disclose the additional costs of “trading away” or trading through unaffiliated brokers, and purchasing alternative products that generate additional fees.
  • Investors buying and holding products like inverse exchange-traded funds (ETFs) for long-term investment. These can be highly volatile products that are generally intended as a hedge against exposure to downward moving markets, and that face a long-term high risk of losing their principal. The SEC is increasingly seeing retail investors holding these products long-term, including in retirement accounts.
  • Problems in the sale of structured products to retail investors, including a failure to fully and clearly disclose fees, mark-ups, and other factors that can negatively impact returns; and
  • Abusive practices like churning and excessive trading that generate large commissions at the expense of the investor.

In addition to enforcement, the Retail Strategy Task Force will have an investor outreach and education component. In that regard, we can expect to see Investor Bulletins and other SEC investor communications generated from the Task Force’s findings and efforts.

SEC Statements On Cybersecurity; An EDGAR Hacking

On September 20, 2017, SEC Chair Jay Clayton issued a statement on cybersecurity that included the astonishing revelation that the SEC Edgar system had been hacked in 2016. Since the original statement, the SEC has confirmed that personal information on at least two individuals was obtained in the incident. Following Jay Clayton’s initial statement, on September 25, 2017, the SEC announced two new cyber-based enforcement initiatives targeting the protection of retail investors, including protection related to distributed ledger technology (DLT) and initial coin or cryptocurrency offerings (ICO’s).

The issue of cybersecurity is at the forefront for the SEC, and Jay Clayton is asking the House Committee on Financial Services to increase the SEC’s budget by $100 million to enhance the SEC’s cybersecurity efforts.

This is the first in a two-part blog series summarizing Jay Clayton’s statement, the SEC EDGAR hacking and the new initiatives. My prior blog outlining SEC guidance on the disclosure of cybersecurity matters can be read HERE.

Chair Clayton’s Statement on Cybersecurity and the EDGAR Hacking

Upon taking office in May, 2017, Chair Clayton formed a senior-level cybersecurity working group to coordinate the sharing of information, risk monitoring and incident response efforts. Chair Clayton’s September 20, 2017 statement was part of the SEC’s ongoing initiatives and necessary to inform the public of the SEC’s own hacking incident. In addition to the revelation regarding the EDGAR hacking, Chair Jay Clayton’s statement emphasized the importance of cybersecurity to not only the SEC, but all market participants.

All market participants engage in data collection, storage, analysis, availability and protection to some extent, all of which are open to cybersecurity risks. Cyber attacks can be perpetrated by identity thieves, unscrupulous contractors and vendors, malicious employees, business competitors, prospective insider traders and market manipulators, hackers, terrorists, state-sponsored actors and others.  Furthermore, the effects of attacks can be significant, including loss or exposure of consumer data, theft or exposure of intellectual property, investor losses resulting from the theft of funds, market value declines in companies’ subject to cyber attacks, and regulatory, reputational and litigation risks.

Cybersecurity efforts must include, in addition to assessment, prevention and mitigation, resilience and recovery. Chair Clayton’s statement provides detail on the SEC’s approach to cybersecurity, including: (i) the types of data they collect, hold and make publicly available; (ii) how the SEC manages cybersecurity risks and responds to cyber events; (iii) how the SEC incorporates cybersecurity considerations in their risk-based supervision of entities they regulate; (iv) how the SEC coordinates with other regulators to identify and mitigate cybersecurity risks; and (v) how the SEC uses its oversight and enforcement authorities, including to pursue cyber threats.

EDGAR Hacking

Before summarizing the other components of Chair Clayton’s statement, I will jump right to the topic that has gained national attention: EDGAR was hacked!  Sometime in 2016, a software vulnerability in the test filing component of the EDGAR system was hacked. The opening was patched once discovered, but the hackers were able to obtain information through test filings that was used to make illicit trading gains. The hackers also obtained personal information, including names, dates of birth and Social Security numbers of at least two individuals. Chair Clayton was not informed of the hacking until August 2017.

The test filing system of EDGAR allows a company to make a non-public test filing of a registration statement or report (or any document that can be filed through the EDGAR system) to be sure the actual filing will be processed correctly. The test filing is usually made hours before the actual filing, but it can be made a day in advance. By having access to material information in filings prior to the marketplace, the hackers could trade on such information and make illegal profits.

When the SEC first announced the hacking on September 20, 2017, it stated that no personal information had been compromised but in a second press release issued on October 2, 2017, the SEC confirmed that forensic data analysis uncovered further depths to the intrusion.  In the October 2 press release, Chair Clayton outlined efforts to review and remediate the 2016 hacking, including:

  • A review of the 2016 EDGAR intrusion by the Office of Inspector General;
  • An investigation by the Division of Enforcement in the potential illicit trading resulting from the 2016 EDGAR intrusion (which seems to indicate that the perpetrator has been uncovered). Chair Clayton was first informed of the hacking in connection with this enforcement investigation;
  • A focused review and appropriate uplift of the EDGAR system with a concentration on cybersecurity matters, including its security systems, processes and controls. This review will include assessing the types of data that run through the EDGAR system and whether EDGAR is the appropriate mechanism to funnel such data;
  • A focused review and appropriate uplift of all systems that include the identification of sensitive data or personally identifiable information. This review will include assessing the types of data the SEC keeps and the related security systems, processes and control; and
  • The SEC’s internal review of the 2016 EDGAR hacking to determine, among other things, the procedures followed in response to the intrusion. This review is being overseen by the Office of the General Counsel and includes an interdisciplinary investigative team including outside technology consultants.  Related to this, the SEC will enhance protocols for cybersecurity incidents.

In furtherance of this review and plan, Chair Clayton authorized the immediate hiring of additional staff and outside technology consultants to protect the security of the SEC’s network, systems and data.

Based on the SEC’s statements and testimony on the matter, there still remains a lot of secrecy surrounding the incident. For instance, the date or dates of the hacking have not been made public. The hacking was reported to the Department of Homeland Security, but the SEC commissioners were not notified. Moreover, the SEC has not revealed the type of information that was accessed nor which companies were affected.

Collection and Use of Data by the SEC

The SEC collects, stores and transmits data in three broad categories, including: (i) public facing data through the EDGAR system; (ii) non-public information including personally identifiable information related to supervisory and enforcement functions; and (iii) non-public information including personally identifiable information related to the SEC’s internal operations.

The first category involves data provided to the SEC by companies (such as public reports under the Exchange Act, and notices of private offerings on Form D) and investors (such as Section 13 and Section 16 filings). The second category includes data on companies, broker-dealers, investment advisors, investment companies, self-regulatory organizations (including FINRA), alternative trading systems, clearing agencies, credit rating agencies, municipal advisors and other market participants. The third category of data includes personnel records, internal investigations and data related to risk management and internal control processes.

Management of Internal Cybersecurity Risks

Notably, Chair Clayton begins this part of his statement by disclosing that the SEC is “the subject of frequent attempts by unauthorized actors to disrupt access to our public-facing systems, access our data, or otherwise cause damage to our technology infrastructure, including through the use of phishing, malware and other attack vectors.” As did occur with the EDGAR hacking, attackers stand to profit from information through trading activities, identity theft and a myriad of other improper uses of the illegally obtained information.

In addition to outside attacks, the SEC monitors for unauthorized actions by personnel.  In 2014, an internal review uncovered that certain laptops with sensitive information could not be located. There have also been instances where SEC personnel have used non-secure personal email accounts to transmit nonpublic information. The SEC mitigates the internal risk by requiring all personnel to complete privacy and security training.

To protect against all of its cyber-related threats, the SEC employs an agency-wide cybersecurity detection, protection and prevention program. The program includes cybersecurity protocols and controls, network protections, system monitoring and detection processes, vendor risk management processes, and regular cybersecurity and privacy training for employees. However, in light of current and changing technological advancements, the SEC intends to step up its efforts overall. As mentioned earlier, in that regard, the SEC is seeking an increase in its annual budget, and a lift on its current hiring limitations.

Just as the SEC expects public companies to maintain internal controls, including from the top down, on cybersecurity matters, so the SEC has internal policies and procedures requiring senior management to maintain policies, and to coordinate with other offices and divisions with respect to cybersecurity efforts, including risk reporting and testing.

Although all offices have responsibilities, the SEC Office of Information Technology has overall management and responsibility for the agency’s cybersecurity. The SEC’s cybersecurity program is subject to review from internal and external independent auditors, including to ensure compliance with the Federal Information Security Modernization Act of 2014 (“FISMA”).

The SEC also must report cybersecurity matters to outside agencies, including the Office of Management and Budget and the Department of Homeland Security, and has established information-sharing relationships with the National Cybersecurity and Communications Integration Center (“NCCIC”), the Financial and Banking Information Infrastructure Committee (“FBIIC”), and the Financial Services Information Sharing and Analysis Center (“FS-ISAC”).

Incorporation of Cybersecurity Considerations in the SEC’s Disclosure-Based and Supervisory Efforts

The SEC incorporates cybersecurity considerations in its disclosure and supervisory programs, including in the context of the Commission’s review of public company disclosures, its oversight of critical market technology infrastructure, and its oversight of other regulated entities, including broker-dealers, investment advisors and investment companies. Related to public company disclosures, Chair Clayton referred to the SEC guidance summarized HERE.

Related to the SEC’s oversight of market infrastructure, including regulation of exchanges and clearing agencies, the SEC adopted Regulation Systems Compliance and Integrity in 2014. Regulation SCI was proposed and adopted to require key market participants to have comprehensive written policies and procedures to ensure the security and resilience of their technological systems, to ensure systems operate in compliance with federal securities laws, to provide for review and testing of such systems and to provide for notices and reports to the SEC. Key market participants generally include national securities exchanges and associations, significant alternative trading systems (such as OTC Markets, which has confirmed it is in compliance with the Regulation), clearing agencies, and plan processors. For a review of Regulation SCI, see HERE.

Furthermore, certain SEC rules and regulations governing broker-dealers, investment advisors and investment companies directly implicate information security practices. For example, Regulation S-P requires registered broker-dealers, investment companies and investment advisors to adopt written policies and procedures governing safeguards for the protection of customer information and records. Regulation S-ID requires these firms, to the extent they maintain certain types of covered accounts, to establish programs addressing how to identify, detect and respond to potential identity theft red flags.

Coordination with Other Governmental Entities

Effective cybersecurity programs require cooperation among government agencies. The SEC shares oversight responsibility on some matters with other agencies, including the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Furthermore, the SEC often coordinates with other agencies, such as the Federal Trade Commission and the Consumer Financial Protection Bureau. The SEC coordinates cybersecurity efforts with each of these agencies, and more.

Enforcement of the Federal Securities Laws

The SEC is committed to enforcing compliance with the cybersecurity disclosure obligations of reporting companies, and in enforcement proceedings against those that purse cyber threats. Part of these efforts include using advanced technology to monitor suspicious trading activity across companies, traders and geographic regions.

Chair Clayton sets out examples of enforcement actions, such as a case in 2016 against three traders for allegedly participating in a scheme to hack into two prominent New York-based law firms to steal information pertaining to clients that were considering mergers or acquisitions, which the hackers then used to trade. In another case, defendants allegedly hacked into newswire services to obtain non-public information about corporate earnings announcements. These are just two examples among dozens of cases.

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